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529 Plans & Beyond: Smart College Funding Strategies for Families

May 2025

By Joel R. Freedman, CFP®, CPWA® and Alex Freedman

Investing in your child’s education is one of the most powerful ways you can help shape their future.

Research shows the average tuition and fees for in-state students at a ranked public college exceed $11,000, while $43,505 is typical at a private institution.1 As costs hit record highs, the sooner you begin saving, the better.

To help you get started, here’s an overview of 529 plans and other college funding strategies to give your children every opportunity to reach their full potential.

529 Plans

A 529 plan is a popular, tax-advantaged way to save for your family’s future education costs. These plans are sponsored by states, state agencies, or educational institutions.

There are two types:

1. Education Savings Plans function as investment accounts, allowing your money to grow tax-free. Withdrawals are also tax-free when used for qualified expenses, such as tuition, fees, books, or room and board at eligible colleges, universities, and vocational schools.

2. Prepaid Tuition Plans, on the other hand, let you lock in tuition rates by prepaying some or all of the costs at participating colleges and universities, helping you circumvent increasing costs.

There are no IRS-imposed annual contribution limits for 529 plans, but most states impose an aggregate account limit. But if your contributions exceed the annual gift tax exclusion of $19,000 for 2025, they count towards your lifetime gift and estate exemption of $13.99 million.2  If your exemption is a concern, you can consult your advisor about “superfunding” your plan, which involves making a lump sum of up to five years of contributions at once.

Potential advantages of 529 plans include:

  • Up to $10,000 a year can be used for K-12 tuition or to pay off student loans.3
  • You may qualify for state income tax deductions or tax credits for contributions when using your home state’s plan.
  • If you are the account owner, there is generally minimal impact on your child’s eligibility for financial aid.
  • You can change your designated beneficiary to a different family member, such as a sibling, cousin, grandchild, or even yourself.
  • Under certain conditions, a beneficiary can roll over up to $35,000 in unused funds without incurring penalties, enabling them to save for retirement.4

If your beneficiary withdraws funds for non-qualified expenses—like transportation or medical services—you’ll owe taxes on those amounts, plus a penalty fee. Also, keep in mind that you’re limited to the investment options available within your specific 529 plan.

Coverdell Education Savings Accounts

Coverdell Education Savings Accounts (ESAs) are another tax-efficient strategy to fund your child’s education. ESAs and 529 plans have similarities, but there are some key differences to consider:

  • ESAs can only be opened for beneficiaries under 18 years of age; contributions must stop once they turn 18, and all funds must be withdrawn by the time they turn 30.
  • The modified annual gross income (MAGI) limit for contributions to an ESA is less than $110,000 for individuals and $220,000 for married couples.5
  • Contributions to ESAs are limited to $2,000 per year for each beneficiary.5
  • With ESAs, you have the flexibility to choose your own investments.
  • In addition to tuition, ESA funds can also be used to cover qualified K-12 expenses.

As you can see, your income, the age of your child or grandchild, and their education timeline all contribute to determining whether an ESA makes sense for your family.

Roth IRAs

You can withdraw contributions to Roth IRAs penalty-free and tax-free at any time—and use earnings without penalty to pay for qualified education expenses for yourself, your child, or your grandchildren. However, the earnings will be taxed as income.

In 2025, you can contribute up to $7,000 to a Roth IRA, or $8,000 if you’re 50 or older. However, if your income is too high—over $146,000 to $161,000 for singles or $236,000 to $246,000 for married couples—you won’t be able to contribute.6

The good news is that if your loved one’s plan changes, you can use the funds in your Roth IRA for retirement savings. Additionally, you can customize your investment with ETFs, stocks, bonds, and index funds for long-term growth. However, it’s important to consider that there is a risk of losing money with your investments, and income from a Roth IRA could impact your child’s eligibility for federal student aid.

Custodial Accounts

Custodial accounts can be a good option if your income exceeds the eligibility limits for a Coverdell ESA or Roth IRA. You can choose between the types of accounts: Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

When you establish a custodial account, you can maintain oversight until your child reaches the “age of majority” in your state. Friends and family can contribute to a UGMA/UTMA, and there are no income or contribution limits, restrictions on how funds can be used, or early withdrawal penalties.

However, since the assets in a custodial account are regarded as your child’s property, they will be included in their Free Federal Student Aid Application (FAFSA).

Start Today

College is a significant investment, but with careful planning, it doesn’t have to be a financial burden.

Whether through a 529 plan, a combination of savings accounts, or even leveraging scholarships and grants, the key is to start early, save regularly, and explore every opportunity.

Eclipse can ease your concerns, provide objective advice, and help you select the best education savings strategy for your family.

Let’s secure a brighter future for your loved ones.

Sources

1 https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic
2 https://www.irs.gov/newsroom/529-plans-questions-and-answers | https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
3  https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
4 https://www.irs.gov/publications/p590a#en_US_2024_publink1000129982
5 https://www.irs.gov/pub/irs-pdf/p970.pdf
6 https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000